An Employer s Guide to Rental Deposit Loans

Transcription

1 An Employer s Guide to Rental Deposit Loans Summary 1) What is the Rental Deposit Loan Scheme? An employee benefit, where staff are offered an interest free loan to pay for their deposit when moving into a privately rented home. Repayments are made in instalments via monthly deductions from monthly salaries, typically over a period of 12 months. The scheme is very similar to travel loan schemes offered by many employers and it operates in much the same way. 2) How will the Rental Deposit Loan Scheme benefit our staff? More and more of your staff, across all ages, are likely to be privately renting. In London alone, the proportion of households renting privately increased by 62% between 2001 and Deposits for private renters are often very high, with the average now costing 979 nationally - and significantly more in London. This is forcing many living in privately rented accommodation, even those on a decent salary, to borrow money for their deposit and/or face financial hardship. A recent YouGov Survey 2 of private renters found that 32% borrowed money to fund their deposit, while another 32% used their savings to pay it. The Rental Deposit Loan Scheme will help your staff to secure a home without incurring high risk debt or enduring financial difficulty. It will be especially beneficial to younger staff, who are moving into privately rented accommodation for the first time. 3) How will the Rental Deposit Loan Scheme benefit our organisation? There are very few employers offering Rental Deposit Loans. Being one of the first will help to position your organisation as an employer of choice, with significant recruitment & PR benefits. Introducing the Rental Deposit Loan scheme will have a positive impact on your staff, by helping them to manage their cash flow and avoid high risk debt. It will also help make employees feel valued by the organization, resulting in greater motivation and productivity. Additionally, it will help you to recruit and retain the best possible staff for your organisation, as talented employees will not Census: KS402EW Tenure, Office for National Statistics, Shelter / YouGov, Tenant Survey 2014

2 be put off applying for, or staying at, your organisation because of the high cost of renting accommodation nearby. 4) How much will it cost to implement the Rental Deposit Loan Scheme? Rental Deposit Loans are fully repaid over the course of a year, so costs are limited to the opportunity cost of investing or saving the money elsewhere. At Shelter, an organisation of approximately 1000 employees, we have calculated the annual opportunity cost of the scheme to be in the region of 195 per anum. Additional administrative costs are estimated to be minimal. 5) Is there any risk to us in offering the Rental Deposit Loan Scheme? The risks are minimal due to safeguards to ensure the full loan will be recovered. Loans are granted on the condition that the rental deposit is held by landlord in a Tenancy Deposit Protection Scheme, while it is made explicit that the organisation is not liable for any end-of-tenancy deductions. Participants must agree that any outstanding loan amount can be deducted from their final pay packet. 6) How do we implement the Rental Deposit Loan scheme? If your organisation already offers employee loans, for travel or study for example, the process can be replicated with a few minor changes. If no such scheme exists, a new process will need to be set up. In both cases, please read on for further details. Offering Rental Deposit Loans You are 3 steps away from offering your employees a low risk source of tenancy deposit funding. 1) Estimate the cost of the scheme The cost of the scheme for the organisation Using Shelter research, Government statistics and basic workforce information, it is possible to estimate the number of employees who will request loans. There are a number of key assumptions to be used as a basis for calculations: Key Assumptions Average Rental Deposit ( ) (Shelter) 979 % of people who borrow deposit (Shelter PRS Survey 13/14) 32% Average Tenure Length (years) (Shelter PRS Survey 13/14) 3.93

3 The first step is to calculate the estimated number of borrowers per UK region. To do so, you will need a breakdown of the number of employees located in each UK region and DCLG rental statistics. The table below illustrates the calculation for Shelter; it is estimated that around 55 Shelter employees would take out a Tenancy Deposit Loan: Borrowers per Region Region England (excluding London) % of residents privately renting (2011 Census / HSfs) Employees number of employees privately renting number of employees borrowing to pay deposit 17% Wales 14% Scotland 12% London 25% Total Next, you need to estimate the number of borrowers per age group. To do so, you will need a breakdown of the number of employees per age group and DCLG rental statistics. The table below illustrates the calculation for Shelter; it is estimated that around 75 Shelter employees would take out a Rental Deposit Loan: Borrowers per Age Group Age Group % of age group privately renting in England (DCLG English Housing Survey 12/13) Employees number of employees privately renting number of employees borrowing to pay deposit % % % % % % and over 4% 0 0 Total You will now have two estimates for the number of employees expected to take out a Rental Deposit Loan. To make a range of approximations of annual cost, it is recommended that you use both of these figures and their average in the final step. In the final step, you need to estimate the number of outstanding loans per year, its meaning in terms of annual cash outlay and the actual cost of this outlay to the organisation. To do so, you will need to know the potential return on investment if the

4 cash was used elsewhere; the opportunity cost. The table below illustrates the calculation for Shelter; it is estimated that in any one year there would be around 16.6 outstanding loans, representing an estimated 16, annual cash outlay and annual cost of interest that could have been earned from saving or investing the principal. Annual cost of Scheme by Participants Rental Deposit Loans taken out Outstanding Loans per year Annual Cash Outlay Actual Annual Cost (based on average interest rate of 1.2%) , , , The cost of the scheme for employees The Rental Deposit Loan Scheme was devised in response to rapidly rising rents and rental deposits, which 32% of renters fund through borrowing. Therefore Rental Deposit Loans are intended to be offered interest free, so that employees have access to cheap, low risk deposit funds. Loans will be tax free for the majority of employees. Under HMRC rules staff are able to borrow up to 10,000 tax free from their employer in a single tax year. This amount is inclusive of other types of employee loan, such as those for travel or study. Additional borrowing over the 10,000 threshold is taxable, with tax due on the excess amount. It is extremely unlikely that an employee will pay tax on a Rental Deposit Loan, irrespective of other borrowing from their employer. 2) Mitigate the risks of the scheme With sufficient safeguards in place, the risks of operating the Rental Deposit Loan Scheme are minimal. The guidelines below will to mitigate the risks. Loan Agreement Employees should be required to sign a loan agreement, authorising the employer to deduct loan repayments from their net salary over a specific period of time. To prevent an employee from leaving the organisation without fully repaying the loan, the agreement should also specify that the employer is entitled to deduct any outstanding loan amount from the employee s final pay packet. For this to be

5 possible, a Rental Deposit Loan should be limited to the level of the employee s net monthly pay. Contractual Notice Period If an employee requires a Rental Deposit Loan larger than their net monthly pay, they should only be able to do so by extending their contractual notice period to two months as a condition of the loan. Then if they leave before fully repaying the loan, the full amount can be recovered from their final two months salary. Example: Employee s rental deposit costs 1,500 but their net monthly pay only amounts to 1,300. They are normally only required to provide 1 months notice if they wish to leave the organisation. Therefore the organisation would only be able to recover 1,300 of the cost of the loan from the employee s final pay packet. With a notice period of two months, it would be possible for the employer to recover the full 1,500 from the employee s final two months salary It is recommended that the total amount an employee can borrow is capped at two months pay, even if they expressed a willingness to extend their notice period beyond two months. A notice period of this length would be impractical. This is Shelter s view, but other employers may allow notice periods to be extended further, or may not wish to allow staff to extend their notice period at all. It is also prudent that employees undergoing probation are either made ineligible for the scheme or have their loan capped. Tenancy Deposit Protection Under the law, landlords/agents must protect a rental deposit in a Tenancy Deposit Protection Scheme within 30 days of receiving it. The Rental Deposit Loan agreement should specify that the employee provides evidence of tenancy deposit protection within 30 days of taking out a loan, otherwise the loan will become immediately repayable. This prevents the misuse of loans, encourages borrowers to hold their landlord/agent to account and ensures that their deposits are safe. Deposit Deductions It should be made explicit that full repayment of the loan is still required if the employee s landlord/agent make any deductions at the end of their tenancy. Rental Fraud Applicants should be encouraged to take appropriate precautions against rental fraud before paying their tenancy deposit. The Action Fraud website has useful advice on protecting against rental fraud. Share the website with employees and clearly specify that full repayment of their loan is still required if they fall victim to rental fraud.

6 Deposit Delays Given the limited supply of decent privately rented accommodation, securing a tenancy can be extremely competitive. Therefore staff need their Rental Deposit Loan quickly to avoid losing out on a home. It is important that financial processes are fast and flexible to enable rapid access to loans. At Shelter, we have specified that it may take up to 5 working days to process a loan. Whatever turnaround time you agree upon, it is vital that employee expectations are managed upfront. Tax Employees will be tax liable on any borrowing over and above 10,000 in a single tax year. Employers should monitor an employee s total borrowing; if a Rental Deposit Loan takes them over the 10,000 threshold then the employer must complete HMRC Form P11D and deduct & pay Class1 National Insurance on the value of the benefit. Failure to do so may lead to problems with HMRC. 3) Implement the scheme It is simple to set up the Rental Deposit Loan scheme. When doing so, staff from HR, Finance and Payroll should be involved. If your organisation already offers other types of employee loan, some of the steps below may be redundant. i. Decide how to make payments The organisation must firstly decide how to make payments. There are two main alternatives, with different levels of responsiveness and risk. Most organisations have the facility to make BACs payments, which enable fast cash transfers directly to the employee / landlord / agent. Yet there is a risk that the employee withdraws their application once payment has taken place, indebting the organisation to the landlord / agent. Payments can also be made via cheque. It will take longer for funds to be deposited in the employee / landlord / agents bank account than with BACS, but it is easier to cancel a cheque if the loan application is withdrawn. Once the payment method has been chosen, the maximum lead time between making an application and receiving funds can be defined. ii. Agree the approval & review process for applications There are a number of approvals & reviews that must be made during the application process. It must be clear who is responsible for:

7 Checking whether the applicant is in their probation period, then approving or declining the loan request Checking whether the loan requested is no greater than the applicant s net monthly pay, then changing their notice period if necessary Approving the applicant s new notice period Checking whether the applicant s total loans will be greater than 10,000, then informing them of tax liability if necessary Reviewing evidence of Tenancy Deposit Protection, then recalling the loan if necessary For an illustrative example of the application process flow, please see Appendix 1. iii. Decide how payments will be processed All applications will need to have a financial code associated with them to allow the payment to be correctly posted onto the organisation s financial system. Including the code on the application form is the best way to do this, so that financial administrators immediately see it. The method of setting up payments will depend on the financial system used; there is no right or wrong way to do this. Some allow the debt to be coded to a single Rental Deposit Loan balance sheet code, with additional analysis coding attached to identify the borrower (e.g. employee s payroll number). Others may require each loan to be assigned to a separate balance sheet code (e.g. individual debtor). iv. Decide how to recover loans The most efficient method to recover loans is through repayment via payroll, where a certain amount is deducted from net monthly pay over a pre-agreed number of months. It is also possible to make the borrower responsible for arranging repayment directly, either through a monthly Direct Debit, Standing Order, BACS payment or cheque. Payments made by the employee via any of these methods would need to be credited to the financial code that the original payment was made against. A word of caution; if the onus is on the employee to make regular repayment, the outstanding debt should be reviewed regularly, otherwise there is a risk that borrower leaves without having fully repaid the loan.

8 If other forms of employee loans are offered (e.g. travel or study), it may be worthwhile setting up a system to track individual debts before offering Rental Deposit Loans. This will be make it easier to confirm that the total loan value is within taxable benefit rules. v. Draw up policy & application form Once the Rental Deposit Loan process and the risk mitigation approach has been agreed, a policy document outlining the rules for applicants must be drawn up, alongside an application form. Please see Appendix 2 & Appendix 3 for examples.

9 Appendix 1 Example: Rental Deposit Loan Process Flow Landlord / Agent Deposit Received Tenancy Secured Deposit Paid into TDP Scheme Employee Complete Application Form N Proceed With Application? Y Withdraw Application Loan Received Receive Confirmation of TDP HR Administrator Has Employee Y Completed Probation? N Loan limited to 500 Does Monthly Salary Cover Loan? N Inform HR Payroll Y Upload Application Form to Employee File Send Employee Tenancy Deposit Guidance Upload HMRC Form P11D to Employee File TDP Confirmation Received? N Y TDP Evidence Recorded on Employee File Loan Recalled HR Manager Application Approved HR Payroll Change Notice Period on itrent Loan Repayment set up on itrent Change Notice Period on itrent Remove Loan Repayment from itrent Application Withdrawn Finance Process Application Form Are Total Loans > 10,000? Y Inform Employee Of Tax Liability Fill In HMRC Form P11D Deduct & Pay Class1 Nat Ins On Value of Benefit Cheque Raised/ Bank Transfer N

10 Appendix 2 Example: Rental Deposit Loan Policy RENTAL DEPOSIT LOANS Shelter offers staff an interest free loan to help pay your tenancy deposit when moving into a privately rented home, up to the level of your net monthly pay. However, if your net monthly pay does not cover the amount you require, you may request to increase your notice period in order to meet the loan amount you need. If you apply for a rental deposit loan of more than one months net pay you are expressly consenting to your contractual notice period being increased to two months. Example: Your tenancy deposit costs 1500 but your net monthly pay only amounts to You are normally only required to provide 1 months notice if you wish to leave Shelter, therefore Shelter would only be able to recover 1300 of the cost of the loan from your final pay should you have not paid it all back at the point of leaving. In order to increase the loan amount, you will need to consent to a variation to your terms and conditions increasing your notice period to 2 months if it is currently less than 2 months. By applying for a loan of more than 1 month's net pay you will be consenting to your notice period being extended to 2 months. Therefore, in the event you leave Shelter, the full loan amount would be able to be recovered from your final 2 months salary if necessary. The total amount you can borrow, inclusive of outstanding travel and/or study loans, is capped at 2 months pay. From a tax perspective you are permitted to borrow up to 10,000 tax free in a single tax year. Additional borrowing over the 10,000 threshold will be taxable. In your probationary period the loan amount is limited to 500. Repayments will then be deducted from your monthly salary over up to 12 months in monthly instalments. If you leave before the end of that period the amount that you still owe will be deducted from your last 2 months salary. Before paying your rental deposit, please ensure that you have taken appropriate precautions against rental fraud. The Action Fraud website has some advice on protecting yourself against rental fraud. Should you fall victim to rental fraud, full repayment of the loan is still required. Once you have paid your tenancy deposit, you must provide HR with evidence of payment and evidence that the deposit is being held in a Tenancy Deposit Protection Scheme by the landlord/agent. A failure to provide this may result in loan becoming immediately repayable. Should the landlord/agent make any deposit deductions when the tenancy ends, full repayment of the loan is still required. Please ask Human Resources for further details. This policy is non-contractual

11 Appendix 3 Example: Rental Deposit Loan Application Form STAFF RENTAL DEPOSIT LOAN AUTHORISATION Shelter offers staff an interest free loan to help pay your rental deposit when moving into a privately rented home, up to the level of your net monthly pay. In your probationary period this is limited to 500. Repayments will then be deducted from your monthly salary over up to 12 months in monthly instalments. This form should be completed in full, and returned with a completed cheque requisition form to Human Resources. Loans will be processed within 5 working days. Employee Name: Department: Employee payroll number: (this can be found on Personal Manager in the Employment Section) Amount of loan: Monthly instalments of: No. of instalments Cheque Payable to: (e.g. John Smith, Foxtons Ltd) Date cheque required: I authorise Shelter to deduct... for the next... months from my net salary. I agree that if I leave before the loan is paid in full, Shelter can deduct the outstanding amount from my final 2 months salary. If the amount of the loan exceeds my monthly net pay and my current contractual notice period is less than two months I hereby agree to my contractual notice period being increased to two months. I understand that this requires me to give Shelter two months notice should I wish to resign. I understand my notice period is increased to two months with effect from the date of my

12 signature below. I also agree that should I fail to comply with the requirement to provide HR with evidence of payment and evidence that the deposit is being held in a Tenancy Deposit Protection Scheme by the landlord/agent the loan may become immediately repayable and Shelter can deduct the entire amount from my salary. Please complete a Cheque Requisition Form and attach to this form. NB: This form needs to be completed and received in HR five working days before the loan is required. Employee signature: Date: Authorised by Human Resources Manager: Date: